Universal Service Fund: now with less incompetence!

While everybody is waiting for Congress to transition the FCC's Universal …

The Federal Communications Commission's Universal Service Fund is cleaning up its act. Yes way—for real. And not only that, it looks like we've been a tad unkind to the benighted program in the past. Turns out that what seemed like a pretty devastating audit of one of the USF's main programs was way off in its calculations.

Here's the short version of that story. The USF, paid for by small tithes on your phone bill, runs four programs: a fund that subsidizes the phone bills of the poor; a program that subsidizes the computer/network needs of schools and libraries; another that underwrites broadband for rural health care facilities; and a division that offers financial support to rural carriers.

That last program is called the "high cost" fund. It helps with the challenges that rural carriers face in trying to provide service to relatively few consumers in spread out areas. Unfortunately, past audits of the fund have concluded that its high cost title has a second, less desirable meaning—a scarily huge error rate in payouts to carrier recipients: 16.6 percent, according to a review that the FCC's Inspector General released three years ago. A subsequent assessment warned that the program overpaid carriers by almost a billion dollars from July 2006 through June 2007.

But the Universal Service Administrative Company's new Annual Report includes a re-check of those numbers that calls them way too high. Not 16.6 percent for that first assessment, USAC says, just 2.7 percent. "USAC anticipates similar results in the final reports on the second and third rounds of the FCC OIG USF audit program," the Annual Report also notes.

Big fixups

Still, the document indicates the company has taken to heart many of the criticisms of the ways that it monitors its four programs. In mid-July of 2008 the Government Accountability Office warned that the FCC has not established meaningful performance goals for the USF. But the GAO reviews' most important finding was that nobody really audits the cost records of these telcos for, well, costs. FCC and USF data collection efforts only peer at a small percentage of recipients, GAO charged, and "generally focus on completeness and consistency of carriers' data submissions, but not the accuracy of the data." This could "facilitate excessive program expenditures," the report very politely concluded.

Now, in 2010, USAC will take a new approach, the company promises, "analyzing data from beneficiaries and from USAC to measure rates of improper payments and using a broad audit program to measure program compliance." The FCC has also established an interim cap on high cost fund payments to competitive carriers. And the low income program is completely revamping itself, with a new cost-tracking system to reduce accounting errors.

All this is good news, because the Universal Service Fund could become a huge engine for the expansion of broadband in the United States. Last year the USF paid out $7.3 billion to its recipients—money going out to 1,865 eligible telecommunications carriers in the case of the high cost program. But the balance of that cash went to phone service providers, not to ISPs.

So the FCC's National Broadband Plan recommends that Congress transitions USF money to two new programs. First, a Connect America Fund to support broadband providers for poor and rural regions. The CAF, as outlined in the Plan, is designed to avoid the errors of High Cost. It will only provide funding in zones "where there is no private sector business case to provide broadband and high-quality voice-grade service." The program will give to no more than one provider per area (as opposed to over a dozen in some present instances). Its recipients will be adequately audited. And, of course, they will have to provide broadband.

Second, the FCC wants Congress to launch a "mobility fund" to help various states get up to speed in 3G wireless.

All this could take a while for the House and Senate to get out the door. The FCC says this transition needs to happen by 2020, with reforms of High Cost and disbursements from Connect America both beginning in 2012. But the agency isn't waiting for Capitol Hill to get started. The Commission's next meeting, scheduled for April 21, will propose "common-sense reforms to the existing high-cost support mechanisms to identify funds that can be refocused toward broadband"—plus a Notice of Inquiry that asks for input on "the use of a model to determine efficient and targeted support levels for broadband deployment in high-cost areas."

Let's see how far the USAC and FCC can get on their own while waiting for Congress to take the big steps. Hopefully they won't have to tread water for too long.

It would be interesting to see why the previous study over measured this number. The USAC advertisement brochure annual report doesn't really provide any information on that.

Also, the distribution of high cost program participants is somewhat suspicious (see the map on page 11). The fact that there would be over twenty providers on one side of a state border and none on the other, when the population density is the same in both areas is strange. It makes me think that some states have a better business environment for the "teleconferencing" scams that some local providers pull.

Edit: Disregard the second paragraph. After reading more carefully I see that HCP means Health Care Provider not High Cost Program on that page.

Full disclosure: I work as the controller for a rural telephone company, although we were not subjected to an audit (yet).

1) The OIG audits were conducted with no materiality threshhold, by accounting firms who won large government bids and generally had almost no knowledge of the complex accounting oddities for the industry. That means that a $1 discrepancy was reported as a finding, and so was $100,000. In addition, the error rate as stated by OIG does not distinguish between errors, so a $1,000 error in the company's favor is the same as a $1,000 in the USF's favor.

2) To the best of my knowledge, the single largest recipient is Alltel. This is due to the "equal support" rule which means that for every customer that Alltel gets in a "rural" area (where the local phone company is certified to received High Cost support) Alltel gets the same amount of money for that customer per month as the local company did. The local company's per-customer amount is based, in part, on the number of customers they have. That means that for every customer lost the local company's per-customer funding goes up, and Alltel reaps the benefits. Mind you, local companies have to prove their costs; competitive companies do not. We, the general body of ratepayers, can thank the various incarnations of the FCC since 1996 for this stupidity, as well as the massive lobbying efforts of the competitive companies (mostly wireless: Alltel, Verizon, AT&T/Cingular, T-Mobile, etc).

The program is screwed up, and everyone in the industry knows it. We cannot survive without it, however: it accounts for nearly 50% of our revenues. If our customers had to pay for the cost of providing service their monthly phone bill, on average, would go from $25 to $100. This amount does not include long distance access.

The biggest issue with adding broadband subsidies to this program is that it will simply cripple the fund into absurdity. It must be repaired before it can be modified. Mind you, I am in full support of broadband support; our customers can barely afford 768k DSL service ($50/month because that's about what it costs us to provide). Makes the big city cable access rates of $40 for 7Mpbs look downright cheap.

The biggest issue with adding broadband subsidies to this program is that it will simply cripple the fund into absurdity. It must be repaired before it can be modified. Mind you, I am in full support of broadband support; our customers can barely afford 768k DSL service ($50/month because that's about what it costs us to provide). Makes the big city cable access rates of $40 for 7Mpbs look downright cheap.

Using broadband means the old analog phone can be shut off in favor of VOIP. VOIP is practically free outside of the costs carriers charge each other. Hell, these people don't even need VOIP, they can just use skype and not get a bill for phone service at all.

Unfortunately, you don't understand how the revenue streams work. For a rural phone company, if you shut off your phone service and get DSL only then you have to pay a much higher rate for DSL (about double) because the rates are somewhat fixed, and regulated via tariff at the FCC level. It's more complicated than that but I simply can't explain, in this context, how it all works together. Suffice it to say that going VoIP is not really going to solve the problem.

Worse yet, VoIP is a MAJOR problem for us rural companies. Why? Because they do not pay us to interconnect their callers with us. That's the other major revenue stream: access charges. AT&T has to pay us to complete a long distance call into our territory. Vonage, MagicJack, etc. are also required to do so, but because they can monkey with the carrier ID information, and we are REQUIRED to complete the call, they can strip off the necessary billing ID information and we are forced to complete the call, record the revenue we should have earned, and then eat the loss. It's another part of the problem that needs to be solved.

How about we save a lot of money and shitcan the USF. I dont have any problems having rural people pay $25-$100 (as quoted above) more a month for service if they aren't having to pay $400/sf for housing.

It's an interesting idea though. I'm heartened at what the FCC is doing - I see action, I see admitting when things are broken, I see people trying to fix things, or at least, try to figure out how to fix things.

I live in Canada, so it's all very tangentially related. If things go very well for you guys down there, hopefully Canada will have good internet by 2015.

I wonder how the Canadian companies work - all of this government subsidizing bothers me. I agree that the one pipe method makes sense, and I'm sorry, but if telephone companies are becoming obsolete, then we shouldn't use taxpayer money to keep them afloat.

Does everyone country do this?

I'd be interested to see what would happen to a government that made intelligent economical decisions, rather than random ones based on whoever was talking the loudest that month.

Most countries around the world have one (wireline) telephone company, that's either a government-owned monopoly, or used to be. In countries where the people demand functional government services, this mostly works OK. Where the people don't have the power to do so, service sucks. For instance, in Djibouti, telecommunication service (of all sorts) is terrible, but the government protects the local monopoly with rules that actively inhibit competition from alternatives. Satellite dishes are disallowed for example, preventing internet access except through the telco.

As for the relative costs of living in the city or the sticks, just remember that the value of a communications network scales quadratically with the number of people connected to it. Rural people dropping phone service that they can't afford makes the system less valuable for those of us in denser area. It also means that those areas will have a harder time tracking the advances made elsewhere, and will become progressively worse off in comparison. I could never live away from a major population center, but I think it's important that those who want to can maintain a comparable standard of living.

I wonder how the Canadian companies work - all of this government subsidizing bothers me. I agree that the one pipe method makes sense, and I'm sorry, but if telephone companies are becoming obsolete, then we shouldn't use taxpayer money to keep them afloat.

The problem becomes "who provides the one pipe"? Telephone companies per se are not becoming obsolete; however, many of the rural and semi-rural telcos are facing a huge cost to upgrade their physical plant. Before anyone shouts "Well, they are obsolete", consider: Someone is going to have to make that investment in infrastructure. The local telco has the pole-attachment arrangements worked out, etc. Who is going to do that? Don't make me laugh by saying "wireless"...there's far too little bandwidth available, even if CTIA gets what they want in terms of taking spectrum from everyone else, to make that work in a sustainable way. Additionally, the leasing, zoning, and permitting costs of all the cell sites required are going to be enormous...much cheaper to use those existing pole-attachment arrangements.

Replace the copper plant with fiber, and the old circuit switches with routers, and put Vonage et al on the same footing with regard to paying connection fees, and then stand back and watch the system succeed.

Redlazer I'd be interested to see what would happen to a government that made intelligent economical decisions, rather than random ones based on whoever was talking the loudest that month. paying the most politicians

Matthew Lasar / Matt writes for Ars Technica about media/technology history, intellectual property, the FCC, or the Internet in general. He teaches United States history and politics at the University of California at Santa Cruz.